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The value of each of the two largest cryptocurrencies – bitcoin (BTC-USD) and ethereum (ETH-USD) – fell earlier this week amid an outright ban on cryptocurrency trading in China and indication of upcoming regulations from the US Securities Exchange Commission.
In general, ethereum prices tend to move in tandem with bitcoin. But the two coins are used for very different purposes that should be considered by investors, says Michael Sonnenshein, CEO of Grayscale Investments, which claims to be the world’s largest cryptocurrency asset manager.
These investment tips apply to the wide range of coins on offer, Sonnenshein said, urging investors to understand the use cases of each cryptocurrency in order to assess its viability as an investment.
“Things like bitcoin are inherently designed to be a form of digital money or a store of value,” Sonnenshein said at Yahoo Finance’s All Markets Summit Plus: Crypto Investing. “While things like Ethereum are supposed to be more of a gas to power decentralized applications, and the list goes on and on.”
“There is a challenge for investors,” he adds. “There are now hundreds if not thousands of digital currencies.”
“I think many investors need to first understand the underlying technology, as well as the use cases of various digital currencies to decide what may make sense to them,” he said.
While prominent critics of bitcoin question its effectiveness as a form of money, many supporters of bitcoin claim that it can be used for transactions and point to companies like Overstock.com (OSTK) and Starbucks ( SBUX) which provide ways for customers to pay in bitcoin.
Speaking at a panel in July, Ark Invest CEO / CIO Cathie Wood said: “Right now high value transactions are taking place on Bitcoin and this is a very useful role. . “
Meanwhile, ethereum includes both the second largest cryptocurrency and the blockchain that supports most non-fungible tokens, or NFTs, which are unique digital assets that can be traded but not replicated. NFTs gained attention in March when a digital work by artist Beeple was auctioned for $ 69 million.
No matter how the coins vary, some investors will miss out on the cryptocurrency opportunity altogether, Sonnenshein of Grayscale acknowledged.
“The truth of the digital currency ecosystem is that it won’t necessarily be right for all investors,” he says. “We tend to find that those who wish to allocate to digital currencies are those who have a higher risk tolerance, a longer time horizon for their investment.”
The risk in space owes in part to the uncertain regulatory environment. Treasury Secretary Janet Yellen urged last month to quickly adopt rules for stablecoins, a form of cryptocurrency that pegs its value in a commodity or currency, like the U.S. dollar.
SEC Chairman Gary Gensler last month described the crypto market as the “wild wild West” and has since indicated his desire to regulate it.
Still, crypto supporters say the market will remain intact even if the United States imposes new regulations. Kristin Smith, executive director of the Blockchain Association, told Yahoo Finance on Monday that the regulation “does not pose an existential threat to crypto.”
As the crypto market has evolved, investors have diversified their portfolios beyond bitcoin and ethereum, Sonnenshein said.
“With this, we have seen a tendency among investors to ensure that if they invest, they also do so through a diversified lens, by investing beyond assets like bitcoin. [and] ethereum, where a lot of market capitalization is now concentrated, ”he says.
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